BNSF’s operating margin
In the previous part of this series, we looked at the 3Q17 revenues for Burlington Northern Santa Fe’s (or BNSF) (BRK.B) Coal segment. Now let’s take a look at BNSF’s operating margins for the quarter.
In 3Q17, BNSF’s revenues rose 2.8%, and its operating expenses rose 2.3%. The pace of revenue growth was marginally higher than its operating expenses. The operating margin in 3Q17 was 36.8%, an increase of 40 basis points from 36.4% in the same quarter last year.
In the above graph, you can see that BNSF’s operating margin was on a rising trend until the third quarter of 2015. Since then, its operating margins have fluctuated. In 2017, they have risen on a sequential basis.
BNSF’s operating margin in 3Q17
In the third quarter of 2017, BNSF’s compensation and benefits expense fell 2.8% to $1.16 billion, from $1.19 billion in 3Q16. Lower head counts led to the fall in employee costs, partially offset by increased health and welfare costs.
The purchased services expense rose 8.2% to $608 million in 3Q17, from $562 million in the same quarter last year. Its fuel expense rose 11.6% to $595 million in 3Q17, from $533 million in 3Q16. Higher fuel prices and increased volumes year-over-year led to the rise in fuel expenses. Depreciation expense was $591 million, a 10.7% rise from $534 million in 3Q16, as a result of a broader depreciable asset base.
Peers’ 3Q17 operating margins
Operating ratio is an important metric in the railroad industry. Operating ratio is the flip side of operating margin. With the rise in freight volumes, railroads tend to be extra cautious in maintaining operating costs within limits. Let’s compare BNSF’s peers’ operating margins in 3Q17 with 3Q16.
- Canadian Pacific Railway (CP): 43.3% in 3Q17; 42.3% in 3Q16
- Kansas City Southern (KSU): 35.6% in 3Q17; 33.1% in 3Q16
- CSX (CSX): 32% in 3Q17; 31% in 3Q16
- Norfolk Southern (NSC): 34.1% in 3Q17; 32.5% in 3Q16
- Union Pacific (UNP): 37.2% in 3Q17; 37.9% in 3Q16
If you want exposure to the transportation sector, you can consider investing in the iShares Transportation Average (IYT). All the US-originated prominent railroads form 24.4% of IYT’s portfolio holdings.
To compare these results with BNSF’s Class I peers, be sure to visit Market Realist’s Railroads page.